5 Blue-Chip Stock Buys to Beat the S&P

These heavily shorted stocks could get squeezed much higher on any positive catalyst.

BALTIMORE ( Stockpickr) -- With the end of 2012 just around the corner, fund managers are scrambling to make up lost ground between their performance and the S&P 500's huge rally this year. Maybe they should be looking at the stocks that everyone else hates.

There's still a lot of anxiety in the market right now -- more investor anxiety, in fact, than there was back in 2008 when stocks were in freefall. So despite the nearly 15% that the S&P has climbed this year, investors keep glancing towards the exits and missing out on more upside in equities. But there's a way to catch up; it all comes down to being contrarian and buying the stocks that everyone else hates.

To be clear, I'm not a big fan of being contrarian for the sake of being contrarian. Instead, the data bear out this against-the-grain strategy.

Going back over the last decade, buying heavily shorted large and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.

It's worth noting, though, that market cap matters a lot. Short sellers tend to be right about smaller names, with micro-caps delivering negative returns when the same strategy was used. Today, we'll replicate the most lucrative side of this strategy with a look at five big-name stocks that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in the last quarter of 2012.

In case you're not familiar with the term, a "short squeeze" is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

Naturally, these plays aren't without their blemishes -- there's a reason (economic or otherwise) that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.